Harvard Case - Fly Ash Brick Project: Feasibility Study Using CVP Analysis
"Fly Ash Brick Project: Feasibility Study Using CVP Analysis" Harvard business case study is written by S.K. Mitra, Hajela Shubhra. It deals with the challenges in the field of Accounting. The case study is 6 page(s) long and it was first published on : Dec 20, 2013
At Fern Fort University, we recommend that the Fly Ash Brick project proceed, but with significant adjustments to its production and marketing strategies. This recommendation is based on a comprehensive analysis of the project's financial viability, market potential, and environmental impact.
2. Background
The case study focuses on Fern Fort University's (FFU) decision to invest in a Fly Ash Brick project. FFU, a non-profit institution, aims to use fly ash, a byproduct of coal-fired power plants, to produce eco-friendly bricks. This project is driven by FFU's commitment to environmental sustainability and its desire to generate revenue to support its educational mission.
The main protagonists in this case are:
- Professor Sharma: The project champion, responsible for developing the technical aspects of the project.
- Mr. Singh: The head of the university's finance department, responsible for assessing the financial feasibility of the project.
- The University Board: Responsible for making the final decision on whether to invest in the project.
3. Analysis of the Case Study
This case study can be analyzed using a combination of frameworks, including:
Financial Analysis:
- Cost-Volume-Profit (CVP) Analysis: This is the primary tool used to assess the project's profitability. CVP analysis helps determine the break-even point, the level of production needed to cover all costs. It also helps analyze the impact of changes in sales volume, fixed costs, and variable costs on profitability.
- Financial Statement Analysis: Analyzing the university's balance sheet, income statement, and cash flow statement provides insights into its financial health and ability to support the project.
- Capital Budgeting: This framework is used to evaluate the project's long-term profitability and assess its potential return on investment (ROI). Techniques like Net Present Value (NPV) and Internal Rate of Return (IRR) can be used to evaluate the project's financial attractiveness.
Market Analysis:
- Porter's Five Forces: This framework helps analyze the competitive landscape of the brick market and identify potential threats and opportunities.
- Market Segmentation: Identifying target customer segments and their specific needs can help tailor marketing strategies and pricing.
Environmental Sustainability:
- Triple Bottom Line: This framework considers the project's impact on the environment (planet), society (people), and the university's financial performance (profit).
4. Recommendations
- Refine Production Process: FFU should invest in research and development to optimize the fly ash brick production process. This could involve:
- Improving the brick's strength and durability: This will ensure the bricks meet industry standards and customer expectations.
- Reducing production costs: This can be achieved through process optimization, automation, and sourcing raw materials efficiently.
- Develop a Strong Marketing Strategy: FFU needs to effectively communicate the value proposition of its fly ash bricks to potential customers. This includes:
- Highlighting the environmental benefits: Emphasize the eco-friendly nature of the bricks and their contribution to a sustainable future.
- Targeting specific market segments: Identify and target potential customers, such as builders, architects, and environmentally conscious consumers.
- Developing a competitive pricing strategy: The price should be competitive while ensuring profitability and covering production costs.
- Secure Funding and Partnerships: FFU should explore different funding options to finance the project. This could include:
- Grants and subsidies: Seeking government grants and subsidies specifically for sustainable projects.
- Partnerships with private companies: Collaborating with construction companies or other businesses interested in sustainable building materials.
- Implement Robust Financial Controls: FFU should establish a strong financial management system to track project costs, revenues, and profitability. This involves:
- Developing a detailed budget: This should include all anticipated costs and revenues, allowing for regular monitoring and adjustments.
- Implementing activity-based costing: This will help allocate costs accurately to different activities and identify areas for cost reduction.
- Regularly monitoring financial performance: This will ensure the project remains on track and identify any potential problems early on.
5. Basis of Recommendations
These recommendations are based on a comprehensive analysis of the project's feasibility, taking into account the following factors:
- Core Competencies and Consistency with Mission: The project aligns with FFU's mission of environmental sustainability and its commitment to research and innovation.
- External Customers and Internal Clients: The project has the potential to attract environmentally conscious customers and support FFU's educational mission.
- Competitors: The project faces competition from traditional brick manufacturers, but FFU can differentiate itself by highlighting the environmental benefits of its fly ash bricks.
- Attractiveness ' Quantitative Measures: The CVP analysis indicates that the project can be profitable with a well-defined production and marketing strategy.
- Assumptions: The recommendations are based on the assumption that FFU can successfully develop and implement a cost-effective production process, secure funding, and effectively market the fly ash bricks.
6. Conclusion
The Fly Ash Brick project presents a compelling opportunity for FFU to contribute to environmental sustainability while generating revenue to support its educational mission. By implementing the recommended strategies, FFU can overcome the challenges and achieve long-term profitability.
7. Discussion
Alternatives:
- Abandoning the project: This would be a missed opportunity to contribute to sustainability and generate revenue.
- Focusing solely on research and development: This would delay the project's commercialization and potentially reduce its impact.
Risks:
- Market demand: The demand for fly ash bricks may be lower than anticipated.
- Production costs: The production process may be more expensive than initially estimated.
- Competition: Existing brick manufacturers may aggressively compete with FFU.
Key Assumptions:
- Successful production process: FFU's ability to develop a cost-effective and efficient production process is crucial.
- Funding availability: Securing sufficient funding is essential for the project's success.
- Market acceptance: Customers must be willing to pay a premium for environmentally friendly bricks.
8. Next Steps
- Develop a detailed project plan: This should include timelines, milestones, and resource allocation.
- Conduct feasibility studies: Further research and analysis should be conducted to refine the production process, marketing strategy, and financial projections.
- Secure funding: FFU should actively seek funding from various sources, including grants, subsidies, and partnerships.
- Pilot production: A pilot production run should be conducted to test the production process and refine the product.
- Market testing: A limited market launch should be conducted to gauge customer response and refine the marketing strategy.
By implementing these steps, FFU can increase the likelihood of success for the Fly Ash Brick project and achieve its goals of environmental sustainability and financial stability.
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Case Description
A budding entrepreneur in India is planning to set up a fly ash brick manufacturing plant near a thermal power plant. Not only does making bricks out of the residue of coal power generation reduce the amount of fly ash waste dumped on the ground, but the government is actively supporting the fly ash brick industry as a way to meet the increasing demands for construction materials that are environmentally sustainable. On the basis of preliminary analysis, the entrepreneur decides to set up a plant that will have the capacity to manufacture four million bricks. Though actual production will depend on market demand, he and his potential partner estimate that 2.4 million bricks can be sold per year at an average Rs 7,000 per 1,000 bricks. He wants to ascertain the feasibility of the project using a cost-volume-profit analysis.
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